Australia's Alumina Issues Profit Warning

The junior partner in the world's biggest alumina producer, Australia's Alumina Ltd. (AWC.AU), issued a profit warning Wednesday due to higher than expected costs and lower than expected production.

Alumina said it expects to post profit before non-cash charges of between A$565 million and A$585 million for 2006 assuming year-to-date average aluminum prices and foreign exchange rates prevail for the remainder of the year.

Previously the company had framed its profit outlook only in terms of metal price, foreign exchange, production and cost adjustments to its A$331 million result last year.

Traders interpreted the statement as a 9% downgrade on the company's previous comments, sending its share price tumbling 7% from an intraday high of A$6.89 to close at A$6.39.

Alumina Ltd. derives its earnings from a 40% stake in AWAC, or Alcoa World Alumina & Chemicals, the world's largest alumina producer which is controlled by U.S.-based Alcoa Inc. (AA). AWAC accounts for a quarter of world alumina production capacity.

"What we're doing here is just updating (guidance) because our sensing of how people are applying that is leading them to an expectation of this year's earnings that are a bit higher than what we think," financial controller Ken Dean told Dow Jones Newswires in an interview.

Previously estimated production cost rises of US$14 a ton over last year are now expected to come in "a couple of dollars higher," he said.

Part of the cost increase is being driven by higher raw material usage - namely energy and caustic soda - and increased maintenance and contractor costs, he said.

Dean said that part of the cost increase was a result of high metal prices.

"In an environment where the realized price has been high we've been prepared to spend a bit more to maximize our production."

In addition, lower quality bauxite being processed in some operations approaching the end of their mine life, such as in Suriname where AWAC operates the Suralco refinery, has pushed up caustic spending.

"Again if we hadn't had a market that was demanding the product we might have compromised a bit," he said.

The cost increases are in line with those faced by other operators in the industry, Dean said.

Another reason for the profit warning relates to how much London Metal Exchange aluminum price movements impact the company's earnings.

Profit sensitivity to LME prices is likely to come in "a little bit lower" than midyear guidance of A$13 million per US$0.01-cent movement.

In terms of production, Alumina Ltd. reiterated delays in AWAC's 657,000-ton expansion of the Pinjarra refinery in Western Australia, which is now expected to end the year at 90% capacity rather than 100%.

Pinjarra's delay means AWAC's overall production volume for 2006 is expected to be between 14.3 million tons and 14.4 million tons compared with last year's 13.7 million tons.

"So there's a little bit of tonnage that's lower than people might have built into an expectation," Dean said.

While the company's realized prices have gone up "far more" than costs this year, Dean warned rising LME aluminum prices may bring "significant" charges to the company's bottom line this year.

"We will have some accounting entries - embedded derivatives that plague us and a number of companies," he confirmed, referring to contracts with energy providers in Australia in which charges rise in line with metal prices.

"If the LME price was to stay above US$1.20 a pound, where it is at the moment, then yes it will be a significant number," he said, noting a price of US$1.10 resulted in a A$40 million net charge in the first half.

Next year's profits are largely in the hands of LME aluminum prices, Dean said

"If everything stayed the same then volume for 2007 will be a little bit higher than it is fo